Could Times-Hearst battle end with P-I strictly online?

Visualize a Seattle Post-Intelligencer that exists only online. A paperless newspaper. The first American daily to make a leap that many observers predict the entire industry probably will make someday.

People have been speculating about an all-digital future for the endangered P-I ever since its owner, The Hearst Corp., and The Seattle Times Co. went to war nearly four years ago. That speculation is intensifying as the conflict approaches the beginning of the end.

On April 9, a private arbitrator will convene a closed-door hearing to decide the companies' long-running dispute over the future of their joint-operating agreement (JOA).

Hearst has said the P-I's continued existence is at stake. If it loses the arbitration, the P-I would find itself without the traditional newspaper underpinnings: no presses, warehouses, trucks or carriers.

An online publication, however, would require none of the above.

A Hearst spokesman wouldn't discuss what the company might do if The Times wins the arbitration. "That's speculation, and I'm not going to speculate," Paul Luthringer said in an e-mail.

But experts in newspaper economics say the all-digital idea isn't entirely unreasonable. The future of the industry, slammed by shrinking circulation and flat or declining advertising revenues, hinges on a successful transition to the Internet, they agree.

An online-only publication would be relatively inexpensive to run. And New York-based media giant Hearst has plenty of money.

"I think it's a great idea," said Miles Groves, former chief economist for the Newspaper Association of America. "You're going to see newspapers going that route anyway."

But financial data indicate the P-I's Web site doesn't generate nearly enough revenue yet to support the paper's current news operation. Groves and other experts say Hearst — or a new P-I owner — probably would face a choice between losing money for at least the first few years or putting out an online product with a significantly smaller staff.

That might not be the only challenge.

Merrill Brown, media consultant and former editor in chief of MSNBC.com, said that in addition to getting smaller, Hearst would have to rethink and restructure the P-I from top to bottom before taking it exclusively online: Make it faster, more narrowly focused, more 24/7.

It's all too risky, said one former Hearst publisher, who requested anonymity. "Going to just an online paper would be suicide at this point," he said. "That model's not ready yet."

Plus, Hearst may have a better alternative. If it loses the arbitration, the JOA contract allows the company to close the P-I, pocket the money it spends on the paper now and collect 32 percent of The Times' profits until today's toddlers are great-grandparents.

"There's probably someone full time [at Hearst], just looking at what the options are," Groves said.

Under the 24-year-old JOA, which designates the P-I a "failing newspaper," the two papers maintain separate news and editorial operations, but the larger Times handles circulation, advertising and production for both.

That's true for online operations as well as print. The Times Co.'s New Media division provides the computer servers and sells the advertising for the P-I's Web site. The P-I newsroom provides its content.

The Times gets 60 percent, Hearst 40 percent of what remains after The Times is reimbursed for the non-news expenses of producing both papers. But The Times says the arrangement no longer works, and that the market will no longer support two dailies.

In 2003, it triggered an escape clause in the JOA, notifying Hearst it had lost money under the contract's formula for the three preceding years.

Two options

Under the JOA, that notice gave Hearst a choice: Either close the P-I within 18 months and get 32 percent of The Times' profits until 2083. Or keep the P-I alive, let the JOA terminate and get nothing from The Times.

Hearst chose a third option. It sued, claiming The Times' losses were either contrived or the result of extraordinary circumstances.

A year ago the companies agreed to submit their dispute to closed-door binding arbitration, with no appeal. The long-awaited hearing — really a private trial — starts in eight days. Arbitrator Larry Jordan is scheduled to rule by May 31.

And after that?

Everything Hearst has said publicly suggests the P-I would disappear if The Times wins. In court papers filed last month, for instance, Hearst's Seattle lawyers said the P-I was "fighting for its existence" in the arbitration.

But in February, Hearst announced a partnership with Microsoft to use the P-I to test new software designed to give computer users a newspaper-reading experience more comparable to print.

That move helped fan speculation that the P-I might have a post-arbitration future as a Web-only venture.

"It would be great if somebody'd try it, because at least we'd get some answers," said Stephen Lacy, a Michigan State University journalism professor who studies media economics.

"But there are a lot of question marks," he said. "There's a lot of risk. ... Corporations tend to be risk-averse."

Online growth

The Internet is one of the few bright spots for the struggling newspaper industry. While print circulation is slipping, traffic on newspaper Web sites is climbing. While print advertising revenue is down, online-advertising revenue is soaring.

Combined print-ad revenues for The Times and P-I slid 2.7 percent in 2006, The Times says. But online advertising revenue grew 39 percent, faster than the industry average.

Despite that growth, online revenue still accounted for less than 10 percent of the JOA's total revenue. That's true industrywide. Those who have peered into the future project newspapers' online advertising revenues won't surpass print revenues for at least another decade.

And economic realities would dictate that newspapers remain print/online hybrids for many years after that, they add.

The Seattle Times online network — seattletimes.com, seattlepi.com and two smaller Web sites — generated about $17 million in ad revenue last year, according to several sources. The P-I's Web site accounted for about 40 percent of the network's traffic.

Assume seattlepi.com also generated about 40 percent of the network's total online revenue in 2006, about $7 million. What would that buy Hearst?

The P-I doesn't disclose its newsroom budget. But the paper has about 200 employees, almost all in news. Several years ago, The Times, which pays similar salaries, calculated that its total newsroom costs — including wages, employee benefits, supplies, equipment, news services and travel — amounted to more than $97,000 per full-time news employee in 2001.

That figure is probably closer to $125,000 today, said Brown, the former MSNBC editor.

Put all those numbers together, and they suggest that the P-I's Web site last year generated much less that what would be needed to support the P-I newsroom as it is now.

Even with continued robust growth, "I don't think online revenue is really sufficient yet to support a first-class newsgathering operation," said Rick Edmonds, media-business analyst at the Poynter Institute, a Florida-based journalism think tank.

And news wouldn't be Hearst's only expense. For example, Brown estimated, Hearst would have to hire an advertising staff of 20 to 40, plus six to 10 technical support people, to do work that The Times Co. now does for the P-I Web site under the JOA.

Brown and Lacy of Michigan State said an all-digital P-I might be able to operate with a news staff of 100. Still, Lacy said, any owner would have to look on the venture as a startup, one that probably wouldn't make a profit for at least five years.

Because it is privately held and relatively immune from Wall Street pressures, Hearst has more freedom to experiment than most newspaper companies, said Groves, the newspaper economist.

But "they'd have to believe that anything they do would increase their overall yield," he added. "Taking the 32 percent [of future Times profits] and the savings from 200 people may be the most rational course," Groves said.

Nagging question

The question that probably nags Hearst is: 32 percent of what? The profits of the privately held Times would depend to a great extent on Times management's decisions, and Hearst would have no say.

Times Publisher Frank Blethen has maintained for years that public service, not profit, is his primary goal, almost boasting in the industry's flush years of profit margins well below those of publicly traded companies.

If Hearst does want that 32 percent, there are at least two scenarios under which the P-I still might survive in some form.

First, Hearst could sell the paper. If The Times prevails in the arbitration and Hearst decides to move toward shutdown, the U.S. Justice Department would require Hearst to put the P-I on the market first to satisfy antitrust laws.

The arbitration agreement Hearst and The Times signed a year ago acknowledges Hearst could sell its paper to a buyer who would operate it outside the JOA. In that event, the agreement says, Hearst still could collect its slice of The Times' earnings, even if it retained an interest of up to 10 percent in the P-I.

Black Press, which publishes two dozen nondaily papers in Western Washington, has been touted as a potential buyer, although the Victoria, B.C., company has said nothing to encourage such speculation. When Hearst briefly put the P-I up for sale in 2003, it got no bites.

The other scenario: Two lawyers familiar with the JOA said it contains nothing resembling a "noncompete" clause. Legally, they said, it appears Hearst could close the P-I, start a new publication, online and/or print, and still collect its share of The Times' profits for another 76 years.

But that probably wouldn't make economic sense, the lawyers added. "Every dollar [Hearst] takes away from The Seattle Times in profit, it's taking 32 cents out of its own pocket," one said.

A Times spokeswoman would not comment on whether the JOA would allow such a move by Hearst.

All this is conjecture. If Hearst is contemplating keeping the P-I alive online, it isn't saying.

"If I were running Hearst, I'd consider it," said Philip Meyer, a University of North Carolina journalism professor and former Knight Ridder executive.

"That's because I'm reckless. The people who run newspapers are generally very conservative. But the future is going to be invented by someone who is reckless."